August 23, 2010
HP and the Winner's Curse?
Last week Dell announced that it would acquire 3PAR. This morning, HP announced that it would be topping Dell's bid by some 33%. HP's bid is an anecdotal data-point in favor of Vice Chancellor Strine's thesis that matching rights are not anti-competitive (see Toys r Us). You see, Dell's agreement with 3PAR includes a series of strong matching rights of the type I written about before (here, here).(The Deal Professor has also recently written about this issue - here.) That's to say, it includes information rights as well as a good faith obligation on the part of 3PAR to negotiate with Dell (from the Dell/3PAR merger agreement):
6.3(b) … Notwithstanding the foregoing or anything to the contrary set forth in this Agreement, if, at any time prior to the Appointment Time, the Company Board receives a Superior Proposal or there occurs an Intervening Event, the Company Board may effect a Company Board Recommendation Change provided that (i) the Company Board determines in good faith (after consultation with outside legal counsel) that the failure to effect a Company Board Recommendation Change would reasonably be expected to be a breach of its fiduciary duties to the Company Stockholders under applicable Delaware Law, and in the case of a Superior Proposal, the Company Board approves or recommends such Superior Proposal; (ii) the Company has notified Parent in writing that it intends to effect a Company Board Recommendation Change, describing in reasonable detail the reasons, including the material terms and conditions of any such Superior Proposal and a copy of the final form of any related agreements or a description in reasonable detail of such Intervening Event, as the case may be, for such Company Board Recommendation Change (a “Recommendation Change Notice”) (it being understood that the Recommendation Change Notice shall not constitute a Company Board Recommendation Change for purposes of this Agreement); (iii) if requested by Parent, the Company shall have made its Representatives available to discuss and negotiate in good faith with Parent’s Representatives any proposed modifications to the terms and conditions of this Agreement during the three (3) Business Day period following delivery by the Company to Parent of such Recommendation Change Notice; and (iv) if Parent shall have delivered to the Company a written proposal capable of being accepted by the Company to alter the terms or conditions of this Agreement during such three (3) Business Day period, the Company Board shall have determined in good faith (after consultation with outside legal counsel), after considering the terms of such proposal by Parent, that a Company Board Recommendation Change is still necessary in light of such Superior Proposal or Intervening Event in order to comply with its fiduciary duties to the Company Stockholders under applicable Delaware Law. Any material amendment or modification to any Superior Proposal will be deemed to be a new Superior Proposal for purposes of this Section 6.3. The Company shall keep confidential any proposals made by Parent to revise the terms of this Agreement, other than in the event of any amendment to this Agreement and to the extent required to be disclosed in any Company SEC Reports.
Now starts an interesting dynamic. Presumably, now that 3PAR has received an offer from HP (here), they are already talking with Dell. One expects that inside Dell people are asking themselves if 3PAR is really worth it.
Truth be told, I have no idea. In fact, that's the point here. No one really knows how much someone else values a target, you can guess, but you can't be sure. All you can know (or estimate) is what your own private valuation of the target is. In any event, Dell is undoubtedly going through the exercise of reassessing its valuation of 3PAR. Did it undervalue 3PAR initially? If its valuation was correct, did Dell underbid for 3PAR in hopes of getting a good deal? Now, Dell has to decide whether 3PAR is worth a bidding contest.
This is where things get tricky. Unless run by a disciplined executive, bidding contests can get emotional and parties can confuse the true goal of acquiring something with residual value for the acquirer with simply winning the contest. We'll see how the Dell side of this plays out.
If Dell decides not to match HP's bid, people in Palo Alto will no doubt congratulate themselves. But, I'm sure someone will also ask whether or not HP had just paid too much.
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